A mortgage firm is offering loans to borrowers with poor credit records,
reviving memories of the "subprime" mortgages blamed for the
credit crisis.

Magellan Home loans will be "piloting" a range of mortgages of up to £400,000 to customers who have had a one-off life event that has resulted in a bad credit score. Such events include County Count Judgements, bankruptcy, bereavement and redundancy.

Applicants for these loans must demonstrate that they have overcome the event that led to their poor credit status by showing a clean credit history in the past 12 months. They must also be over 25 and have a minimum income of £25,000 as evidence that they can afford the mortgage repayments.

Borrowers will be charged a hefty interest rate of 8.55pc, as well as application fees. Customers will also need to provide a 25pc to 35pc deposit.

This type of mortgage, known as subprime lending, was common before the financial crisis five years ago as it was highly profitable for lenders. This lending, however, was later seen as reckless and a likely contributor to the financial crash of 2008.

With house prices rising at its fastest pace in three years, and Government schemes such as Funding for Lending and Help to Buy, a growing number of Britons will be looking for mortgages.

Andrew Hagger, founder of moneycomms, said: "At 8.55pc plus a 1.5pc fee this is a heavy price to pay for those who have suffered a 'financial wobble' particularly as some of these borrowers will have 35pc equity in their property.

"These loans are a recipe for disaster – especially when rates rise. The mortgage rate is variable, linked to Libor, and if rates rise say 2pc or 3pc in the next few years the monthly repayments will shoot up."

But he added: "The profit margins look good for the lender and I'm sure more providers are waiting in the wings for a piece of some new subprime action."

Other lenders, like Melton Mowbray building society, had offered mortgages to those with very poor credit records, but withdrew the deals due to high demand and policy limitations.

David Hollingworth of London & Country Mortgages said: "8.55pc is high, considering you still need to have a 25pc to 35pc deposit as well.

"It is good that there are more options available to those who have run into difficulty. For some people, a bad credit score may not have been their fault – losing a job for example. Furthermore, some are unaware that their mortgages aren't being paid. If people can show they have dealt with the problem, they should be able to access some kind of mortgage.

"At the peak of the market, the difference in rates narrowed enormously between adverse credit deals and standard deals – now this is the price you have to pay for the increased lending risk it represents."

Matt Gilmour, managing director of Magellan, said: "Magellan Home loans is opening up a new route to home ownership by making mortgages available to borrowers who can demonstrate they have regained control of their financial affairs.

"In our opinion, a short-term financial wobble should not preclude borrowers from mortgage finance on a long-term basis. We're delighted to be piloting a new proposition which gives credit impaired borrowers a real chance to obtain mortgage funding once again."